A Price Floor Set Below The Free Market Equilibrium

Price floor is enforced with an only intention of assisting producers.

A price floor set below the free market equilibrium.

Simply draw a straight horizontal line at the price floor level. The intersection of demand d and supply s would be at the equilibrium point e 0. If it s not above equilibrium then the market won t sell below equilibrium and the price floor will be irrelevant. However a price floor set at pf holds the price above e 0 and prevents it from falling.

However price floor has some adverse effects on the market. This graph shows a price floor at 3 00. Government set price floor when it believes that the producers are receiving unfair amount. For a price floor to be effective it must be set above the equilibrium price.

If a price floor is set above the free market equilibrium price as shown where the supply and demand curves intersect the result will be a surplus of the good in the market. A price ceiling is a maximum amount mandated by law that a seller can charge for a product or service. In this case the floor has no practical effect. 39 because minimum wage is a price floor a it will be set below the market equilibrium price.

It s generally applied to consumer staples. C it will increase the number of jobs available in the labor market. A price floor could be set below the free market equilibrium price. In a perfectly competitive market products are priced at the pareto optimal point.

D it will maximize consumer surplus. When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result. Drawing a price floor is simple. Price floors prevent a price from falling below a certain level.

If price floor is less than market equilibrium price then it has no impact on the economy. In the first graph at right the dashed green line represents a price floor set below the free market price. Introduction to deadweight loss. The government has mandated a minimum price but the market already bears and is using a higher price.

Price floors and price ceilings often lead to unintended consequences. B it will create a deadweight loss.